- Industrial real estate under construction dropped 43% YoY in Q3, the largest drop since 2008, signaling a serious slowdown in new building activity.
- Vacancy rates for industrial spaces rose to 6.4% in 3Q23, up from 4.6% last year, reflecting softer market conditions and slower lease-up rates.
- Developers are now pivoting toward specialized projects, including data centers, to meet shifting market demands, particularly due to the rise of AI-driven needs.
The industrial real estate sector is experiencing a notable pullback in new construction amid rising vacancy rates, as reported by Bisnow.
According to Cushman & Wakefield data, industrial square footage under construction in Q3 fell by 43% from last year, marking the steepest drop since the 2008 recession.
This trend, combined with higher vacancy rates, points to a cooling period in the once-booming industrial market.
By The Numbers
Industrial real estate experienced a frenzied demand surge during the height of the pandemic, largely driven by e-commerce. In 2022, there were a record-breaking 63 leases for spaces of 1 MSF or more. By 2023, that number dropped to 43, indicating a normalization in demand, according to CBRE.
Industrial vacancy rates are also climbing, hitting 6.4% in 3Q23, up from 4.6% a year earlier. 4Q23 saw warehouse vacancies reach their highest levels since 2020, partly driven by a surge in construction completions—marking the second-highest quarterly completion rate on record.
Shrinking Demand
With more warehouse space available, tenants are gaining leverage for the first time in years. Cushman & Wakefield’s Jason Price noted new projects are taking longer to lease up, and there’s less urgency for new builds.
The rise in vacancies, coupled with a fall in consumer demand, has reduced the need for expansive storage facilities, which has ultimately slowed the market.
Shifting Tactics
The industrial slowdown has also impacted employment. Warehouse and storage jobs have dropped from their pandemic highs, with the Bureau of Labor Statistics reporting a decrease of over 171.6 KSF jobs since May 2022. In September alone, warehouse operators lost an additional 11K jobs compared to the previous month.
In response to the shifting market conditions, some developers are adapting by shifting their focus toward specialized construction projects, such as data centers. Panattoni Development Co., a major player with over 610 MSF of industrial development under its belt, is now investing in data centers to capitalize on the demand created by the AI boom.
Looking Ahead
According to Jason Price, the industrial real estate sector is likely to see a rebalancing in the coming year as new construction projects decline and vacancy rates stabilize.
“We should start having that inflection point at some point next year, and supply and demand come into more balance,” Price told WSJ. As fewer projects break ground, the imbalance between supply and demand may gradually correct, potentially lowering vacancy rates.